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Addendum Acting Retrospectively May Be Valid if it Clarifies The Relationship between the Parties – ITAT Delhi

Introduction

In a pivotal decision by the Income Tax Appellate Tribunal (‘ITAT’) Delhi in CRM Services India (P.) Ltd. v. Deputy Commissioner of Income-tax[i], the absence of a registered agreement is discussed between the related entities in the background of transfer pricing. The ITAT discussed the definition of transaction under s. 21 of the Income-tax Act, 1961 and r. 10B(2) of the Income-tax Rules, 1962 and analysed the requirements of written agreement between the parties.

Facts

  • CRM Services India (‘Appellant’) a wholly owned subsidiary of Teleperformance USA, an America-based company (‘TP USA’), provides voice-based customer support services to various customers of AT&T, under the ‘Foreign collaboration agreement’ dated 02.01.2002. The Appellant is compensated for its services on an hourly basis.

  • Further, intangible property has been licensed to the appellant under the Intangible and Proprietary Licensing Agreement (‘IP Agreement’). Royalty amounting to Rs. 1,28,68,402/- was remitted to TP USA as per the terms of the agreement.

  • Transfer Pricing documents maintained for the relevant period were accepted by the transfer pricing officer (‘TPO’), for the provision of call centre services. However, the payment of royalty was disallowed by the TPO. The Dispute Resolution Panel (‘DRP’) subsequently restricted the adjustment of royalty.

  • The parties entered into an addendum to the IP Agreement leading to the ITAT’s Co-ordinate Bench, setting aside the order passed by the TPO and directing the assessing officer and the TPO to reconsider the issue.

  • The TPO then passed a new order in favour of the revenue asserting that the addendum was intended to nullify the earlier order passed by the DRP and thus, should be disregarded as evidence. The order of TPO was affirmed by the DRP.

Held

  • The ITAT ruled in favour of the Appellant and set aside the order passed by the TPO and DRP. It questioned the validity of the addendum as a piece of evidence.

  • It was held that the addendum merely crystalises the conduct of the parties and introduces no new terms or conditions. Therefore, the findings of the DRP and the TPO that a subsequent agreement cannot retroactively affect the terms of an earlier agreement—were deemed unsustainable.

  • Furthermore, the ITAT discussed the nature and intentions behind the addendum and observed that the parties had always intended to remit royalty for the use of intangible property.

  • The ITAT also deliberated on the legislative intent behind the requirement of an agreement and focused on the mutual conduct between the parties to be determinative of actual intentions and held that there is no requirement for a registered or notarized agreement.

Our Analysis

In this case, the judiciary deliberated upon the position of an unregistered and unstamped addendum to an agreement, wherein the addendum acted retrospectively. It has been clarified in this case that the addendum is acting as a measure to clarify the intent of the parties and therefore, it is valid.

The ‘rule of consistency’ has been discussed in this judgment and it has been held that if the addendum did not act as a measure to change the nature of the relationship between the parties and the fiscal relationship remained ‘consistent’, then the validity of such addendum cannot be challenged.



End Note

[i] [2024] 161 taxmann.com 508 (Delhi - Trib.) [dated 08.04.2024]



Authored by Rosy Gupta, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

 

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